Financial Post Letter

Fed to blame

Financial Post Published: Tuesday, April 15, 2008

Re: Does it Really Matter who is President?, William Watson, April 3

William Watson makes an excellent point that President George W. Bush “entered office more ideological and less interventionist than any of his recent predecessors,” but has ended up seeming to have abandoned the original perceptions, while also abandoning those that elected him because of those perceptions. Was he hamstrung and stymied by “constraints of … inherited structures and interests”? Well, maybe …

Firstly, I’ll be more blunt and call those inherited structures and interests exactly what they are: A deeply entrenched political bureaucracy which is the real power behind the throne, so to speak, ultimately bending elected officials to its manipulative commands. One could cut G.W. Bush some slack and recognize he has paid a price for not doing something to expose these powers behind the throne–and that price is the carefully crafted media image of a President flummoxed and out of his depth, becoming a figure of ridicule. After Mr. Bush is long gone, this entrenched bureaucracy will live on, and the same scene will replay over again with whoever is elected as the new President.

Mr. Bush has become any easy punching bag, easily vilified and Diane Francis points to the overly ambitious Eliot Spitzer traveling to Washington to make some easy political points by pointing his sanctimonious and hypocritical finger at him as being the cause of the current subprime meltdown. Whatever direct influence Bush may have had in that is questionable.

Statists like Mr. Spitzer demand more economic interference and financial regulation, while pretending that an unregulated financial market actually exists. This type of straw-man argument scores political points, even if the reality contradicts their assertions. No free financial market has existed in the United States since the creation of the Federal Reserve, when the Federal Reserve Act was signed into law by President Woodrow Wilson on Dec. 22, 1913.

A quasi-governmental agency that is deeply politically directed, since Fed governors must be politically approved. The Fed manipulates interest rates and regulates the money supply, fundamentally powerful state directed functions, and deleterious to all freedom.

Unedited Version of NP Letter(March 24, 2008)

The U.S. Federal Reserve was established in 1913, signed into law by President Woodrow Wilson. The FED was to be based on the European model of centralized banking in which the state becomes involved directly in the day to day economic activities on the nation. Although opposed by some who mistrusted government intrusion on such a scale into the economy, it was supported by the “Progressive” Democrats who desired the creation of an agency to end the alleged Wall Street control of the monetary policy of the country. Even then Wall Street and capitalism represented a popular scapegoat to be stereotyped as the villainous cause of economic misery, which could be rectified by creating a new government bureaucracy.

It can be argued that since the creation of the FED that periodic economic crises have worsened. The causes can be argued but that economic crises have occurred AFTER the creation of the FED is not arguable. The declared reasons for creating the FED not resolved the problems of economic uncertainty which it was argued would be resolved by creating the FED. While the FED may not have caused the Great Depression, economists, such as Milton Friedman, state that it did exacerbate the effects of the depression with its interference in manipulating the money supply and interest rates.

From the economic boom times of the 1920’s which were times of rapid economic expansion leading to the Great Depression of the 1930’s, the FED has established a long enough history over the ensuing decades to at least question its efficiency and its reasons for a continued existence. Economists such as John Maynard Keynes and John Kenneth Galbraith, advocating for state bureaucratic interference in the economy have always been embraced by the so-called progressive politics of those seeing the state as the vehicle for benevolence and largesse to constituents seeking a hand out, while being opposed by those that recognize the simple truth that expanding government bureaucratic interference diminished individual liberty, while undercutting the character trait of self-reliance and personal responsibility.

The Bretton Woods agreement was ratified by many nations of the world and became operational in 1946. The agreement established the exchange rate of each country’s currency within an agreed upon band of fluctuation, attempting to establish a stable currency exchange rate in terms of gold between currencies of the nations ratifying the agreement. The Bretton Woods agreement collapsed in 1971 as the system became increasingly unworkable, and the United States suspended the convertibility of its dollars into gold.

By increasing the dollars in circulation the Federal Reserve and the U.S. Treasury create inflation, where cheapened government created dollars decrease the value of the dollar while increasing the price of the goods and service being purchased.